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Tata Consultancy Services Ltd.'s second-quarter earnings missed profit and margin estimates as the IT giant grappled with weak demand and high pass-through costs. Despite this, brokerages remain cautiously optimistic about a turnaround in the medium term, citing a potential recovery by the end of fiscal 2025.
Most brokerages agree that TCS remains well-positioned for long-term growth, with expectations of a stronger rebound from fourth quarter of fiscal 2025 onwards.
TCS Q2 Results – Key Highlights (QoQ)
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Revenue up 2.6% at Rs 64,259 crore (Bloomberg estimate: Rs 64,186 crore).
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Ebit increased 0.2% to Rs 15,469 crore (Bloomberg estimate: Rs 15,995 crore).
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Margin expanded by 50 basis points to 24.1% (Bloomberg estimate: 24.90%).
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Net profit fell 1.1% to Rs 11,909 crore (Bloomberg estimate: Rs 12,543 crore).
While the firm saw a 5% year-on-year profit increase, its QoQ decline and miss on margins reflected a challenging business environment. Several brokerages pointed to softer demand for discretionary projects and client-specific issues in key markets such as North America and the UK.
Brokerages On TCS
HSBC maintained its “buy” rating with a target price of Rs 4,540, citing slow demand recovery and the weakness in discretionary spending. It noted that margins were a rare miss for TCS, though it remains confident in the company’s long-term management strength.
JP Morgan kept an “overweight” rating, with a target price of Rs 5,100. The brokerage flagged concerns about the international business, which saw its weakest growth since the COVID-19 pandemic, and the concentration of growth stemming from the margin-dilutive BSNL contract. Despite these issues, JP Morgan advised using any sharp correction in the stock to add more.
Citi Research remained bearish on TCS, maintaining a “sell” rating with a target price of Rs 3,935. Citi noted the increase in subcontractor costs and a weak performance in North America, though it did see some positive signs of recovery in the financial services sector. The brokerage expects further pressure on margins due to cost increases and a cautious demand outlook.
CLSA maintained a “hold” rating, trimming its target price to Rs 4,094. The brokerage pointed to the sharper-than-expected ramp-up in the BSNL deal and client-specific challenges in the UK and US, which affected revenue growth. CLSA remained cautious on the near-term demand but expects improvements in the medium term.
Nuvama Institutional Equities held its “buy” rating, with a revised target price of Rs 5,100, citing optimism for demand recovery in sectors like BFSI and retail. The brokerage expects margins to recover once the BSNL deal contribution starts tapering off by the last quarter of fiscal year 2025, driving overall growth for TCS.
Nirmal Bang upgraded TCS to “buy” with a target price of Rs 4,964, citing the company’s strong deal pipeline, investments in AI, and leadership in cloud and cybersecurity. While the quarter saw modest growth, the brokerage is optimistic about TCS’ long-term prospects, with expectations of a material uptick in fiscal year 2026.
TCS Q2 Results Review – Miss On Both Top, Bottom Line, Commentary Remain Stable: Dolat Capital
Client-Specific Issues and Discretionary Spend
Most brokerages noted that TCS’ performance was weighed down by client-specific issues and weak discretionary spending, particularly in North America. The ramp-up of the BSNL contract—a low-margin deal—added to the pressure on overall margins, with some brokerages highlighting the impact of higher pass-through costs. This led to a drag on margins, which had already been under strain from lengthening sales cycles and a cautious global IT spending environment.
Outlook
While the near-term outlook for TCS remains muted, brokerages see potential for recovery from the last quarter of fiscal 2025 onwards, as the impact of the BSNL deal starts to fade and discretionary spending picks up. Sectors such as banking, financial services, insurance, and retail are expected to lead the rebound, with gradual improvement in North American markets and a stabilisation in Europe.
Despite short-term challenges, brokerages agree that TCS is well-positioned for long-term growth, supported by its strong cash flow, leadership in emerging technologies, and solid deal pipeline. The company’s investments in AI, cloud, and cybersecurity are expected to pay off as demand in these areas strengthens over the coming quarters.
Management
TCS management acknowledged the challenging business environment, highlighting sluggish demand in key markets like North America and the UK. CEO K. Krithivasan said that client-specific issues and macroeconomic uncertainties were weighing on discretionary spending, especially in sectors such as banking and retail.
However, the leadership remains optimistic about the long-term prospects, pointing to a strong deal pipeline and growing traction in AI and cloud services. Management reiterated their focus on operational efficiency and margin recovery, while expecting demand to improve gradually over the next few quarters, particularly by the end of the current fiscal.
Shares of TCS closed at Rs 4227.40 apiece, down 0.60% on Thursday, before the release of its first quarter earnings. Since announcing the results for the March quarter on April 12, the stock has declined 2%, compared to nearly 7% gain in the benchmark Nifty 50.
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